Q3 2022 Ingevity Corp Earnings Call
Q2 earnings call and webcast will be starting in a few minutes time.
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Thank you for your patience today's call will be starting shortly.
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Good morning, My name is breaker and I will be your conference operator for today at this.
This time I would like to welcome everyone to be in jeopardy that quote that 2022 earnings call and webcast.
Your lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session.
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Thank you.
Jordan I pulled our treasurer and Investor Relations you May begin your conference.
Thank you Brito.
Good morning, and welcome to <unk> third quarter 2022 earnings call.
Early this morning, we posted a presentation on our Investor site that you can use the following today's discussion.
It can be found on I are done or do you have any dot com under events and presentations.
Also throughout this call we may refer to non-GAAP financial measures, which are intended to supplement not substitute for comparable GAAP measures.
Definitions of these non-GAAP financial measures and reconciliations to comparable GAAP measures are included in our earnings release and are also in our Form 10-K.
We may also make forward looking statements regarding future events and future financial performance of the company. During this call. We caution you that these statements are just projections and actual results or events may differ materially from those projections as further described in our earnings release.
Our agenda is on slide three.
Our speakers today are John Fortson, our president and CEO Mary Hall, our CFO , Ed Woodcock President of performance materials, and rich White president of industrial specialties and payment technologies.
In addition, Steve Hume, President engineered polymers, and Eric Ripple, Chief growth and innovation officer will be available for questions and comments.
John will start us off with some highlights for the quarter.
Maryann will follow with a review of our consolidated financial performance Rich on behalf of his performance chemicals segment colleague, Steve who will discuss the entire performance chemicals segment.
And Ed will review the results of performance materials.
Finally, John will conclude with our outlook for 2022.
Over to you Don.
Thanks, John and good morning, everyone. Please turn to slide four and we'll jump right in.
Germany had another great quarter, and I want to thank everyone on the team for how well they have navigated the current market.
This is an environment, where we continue to hear other chemical and material companies reduced their guidance and paint a pessimistic outlook.
Yes for in Jeopardy. This quarter, we posted record sales adjusted EBITDA and adjusted EPS.
Our performance chemical segment saw record sales across its businesses and engineered polymers payment technologies and industrial specialties.
Lawrence materials saw significant volume growth as global auto production increased during the quarter.
Our consolidated results are directly due to our team's focus on attractive end markets, where customers require unique performance characteristics and where we can gain market share.
For example.
With increased automotive production this quarter, our engineered polymers capa business sold more higher value products used in auto applications, such as paint protection film in Jounce bumpers and of course higher auto production aided performance materials with significant volume growth in our activated carbon honeycombs.
Another end market, where our products are experiencing strong demand as road construction munis.
Municipalities are increasingly asking for sustainable performance enhancing products like E. Both arm, which lowers the amount of energy needed to pay road, while reducing harmful emissions.
In the quarter input costs, including energy raw materials and logistics continued to rise.
In industrial specialties volume was constrained due to lower availability of key raw materials.
By strategically focusing our product mix on derivatives products that bring higher value to both our customers and two in Germany and markets like oilfield agricultural chemicals, and adhesives industrial specialties was able to post a record sales quarter, even on lower volume.
In other businesses, we have experienced a lag between the timing of higher input costs and our price increases either due to the speed with which the cost rose due to the nature of our supply agreements.
These are timing issues that will correct as we adjust prices and represent expected upside into next year.
We continue to generate strong free cash flow and this allowed us to return cash to shareholders pay down some debt and continued spending on growth initiatives.
As we announced a few weeks ago, we completed the acquisition of Ozark materials and are excited to have the Ozark family of specialty products to support this end market.
Our integration efforts are moving forward and remain on track.
They are a high quality team and a great addition to <unk>.
There are tremendous opportunities for our teams to work together to better serve our customers with a broad array of products and technologies.
We were also pleased to announce the completion of one of our key organic growth initiatives. As we finished the addition of caprolactam polyol production at our Deridder, Louisiana site.
We have been telling you about the demand customers have for our capital polyol.
Our polyol is enhanced high performing end use products such as top coach on auto our planes coatings on specialty flooring and boats protective films in footwear by making them stronger and more durable the.
The addition will increase our global capacity by 40%.
Before I turn it over to Mary you all know that ESG is in our DNA at in Jeopardy. Our purpose is to purify protect and enhance the world around us and we work to achieve this every day as such we were extremely pleased when we were awarded a gold rating for corporate social responsibility by a gavotte us.
This rating puts us in the top 3% of respondents in a specialty chemical sector.
It is a reflection of who we are what we do and how we do it.
With that I'll turn it over to Mary to discuss the financials.
Thanks, John Please turn to slide five as you heard from John We're very pleased with that third quarter results with sales up 28% and adjusted EBITDA up almost 16%, we delivered a record quarter on the top and bottom lines as our products and technologies continue to demonstrate the value to our customers.
Due to their unique performance attributes and the sustainability benefits they deliver.
As we move down slide five please note that we've excluded depreciation and amortization from gross profit and SG&A in order to provide more transparency to the changes year over year, a reconciliation to GAAP gross profit and SG&A is in the appendix.
As you can see our adjusted gross profit dollars were up over 21% year over year, driven by the higher sales, while our adjusted gross margin declined 220 basis points.
This decline was due to margin compression in both segments driven by continued inflation impacting input costs.
Similar to Q2.
Performance chemicals, adjusted gross margin was negatively impacted by higher input costs and raw material constraints and margin compression in performance materials was primarily attributed to the timing of raw material cost increases versus the timing of customer price increases.
Particularly in automotive, we're beginning to see the pace of raw material increases moderate and we expect to see our gross margins improve as that occur.
SG&A, excluding depreciation and amortization increased about $12 million year over year as we continue to fund strategic growth initiatives and also saw high higher labor related costs.
Our strong sales performance drove record adjusted EBITDA of $138 $2 million up nearly 16%, while our adjusted EBITDA margin was down about 300 basis points due primarily to the combination of gross margin pressure and SG&A increase are.
Our quarterly diluted adjusted EPS of $2 nine.
Is a record for the company.
Many chemical companies have commented recently on the negative foreign exchange impact to both our topline and bottom line results as a global company and jeopardy saw some pressure on the top line from the strong U S dollar, which negatively impacted sales by about 2%. However, the impact of foreign exchange.
On our bottom line was not meaningful we attribute this primarily to a combination of our diverse global sales Max and global manufacturing input footprint.
This is another area, where our diverse end markets and geographies enables us to perform well despite market volatility.
Turning to slide six and the upper left hand chart, you can see our sales through the third quarter have outpaced full year sales in some prior years, you've heard us attribute much of the sales growth. This year the pricing actions, we've taken I want to emphasize that our ability to increase prices.
Not just a function of capturing higher input costs. It's also a reflection of our success over several years and managing and upgrading our mix of sales to more diverse derivatives products and technologies that drive higher performance and value for our customers and for US a win win.
For example in 2016 about one third of our sales came from lower margin commodity products predominantly in our industrial specialties business today that number is cut in half to about 17%. We will continue to focus on improving mix to drive value for our customer.
And for our shareholders.
The upper right chart shows another quarter of strong free cash flow as you can see in the capital allocation chart bottom right. That's allowed us to continue returning cash to shareholders through share repurchases and we have repurchased over 2 million shares year to date, while maintaining leverage within our two to two five.
Five times target area, we completed the Ozark acquisition October 3rd So it is not included in these Q3 numbers I will note. However that we finance the $325 million purchase price with a combination of cash on hand and borrowings on the revolving credit facility.
So our leverage will shift up in Q4, but should stay under three times and be back in our target range in less than 12 months.
In summary, we delivered a strong third quarter executing well on our organic and inorganic growth initiatives, while managing to a balanced capital allocation strategy should the business environment worse than we believe we are well positioned to manage through the challenges and now I will turn it over to rich for a more.
On performance chemicals.
Thanks, Mary and Hello, all turning to slide number seven as John mentioned in his opening comments.
<unk> chemical segment posted record sales across all three businesses in the third quarter.
Sales of $337 million over 30% higher than last year, driven by a product mix that was heavily weighted toward high performance derivatives products first command at higher prices.
These product mix helped offset will continue to be an inflationary environment for input cost and resulted in a record EBITDA of $77 million for the quarter, 22% higher than last year.
Our engineered polymers team rebounded strongly from last quarter's unexpected downtime due to constrained raw material availability and random plant near capacity.
<unk> for the entire quarter to meet the demand for our polyolefin thermoplastics customer demand is strong for these high performance products, because they make and products more sustainable by giving them greater durability and resistance to wear and tear.
In Q3, we continue to see strong growth in automotive as well as footwear and apparel with the performance attributes of our products are appreciated.
One of the fastest growing end markets for the camera products as automotive paint protection films, where our polyol technology is incorporated to provide films with non yellow clarity self healing and stain resistant properties that can help keep vehicles looking showroom, new and improved the resale value.
Third quarter sales of $69 $5 million was up over 31% from a year ago fantastic performance.
Engineered polymers team has done an excellent job managing customer requirements as demand for <unk> continues to exceed supply and they generated greater capacity by completing the polyol production facility at our <unk> site in Louisiana.
As mentioned earlier has increased production capacity by 40%.
Production commenced in September the first commercial sales. Following in October . This is expected to support the future growth of these specialty products and geographic location and the geographic locations should help serve the customer base in this region as well as reduced global lead times.
Turning to payment technologies Q3 sales of $88 $3 million, an all time record quarter was up over 20% versus last year due to strong paving season.
During the quarter, we saw increased focus from municipalities on sustainability, which have led to increased technology adoption in both our eagle firm warm mix product and pavement preservation product lines.
<unk> enables paving at a lower temperature is extending the paving season, and reducing energy consumption as well as overall emissions, our pavement preservation products save time energy and money by extending the life of existing roads. As you know we closed on Ozark acquisition early in October and are extremely.
Cited as we have begun working with our team to complement our existing payment technologies products.
We are working to leverage the strength of our teams and processes to create synergies such as utilizing the resin we produce and their payment marking formulations, we expect to capture approximately $5 million of synergies during the next 18 months.
Industrial specialities had a record quarter with sales up over 35%. Despite a host of challenges during the quarter.
We experienced volume cost rates due to raw material availability was limited our production capacity as well as drove higher input costs. In addition, we saw certain customers choose to work down inventory levels as they assess the macroeconomic environment to.
To meet these challenges the team continued to focus on derivatives products, which allowed us to capture higher prices to offset increased input costs. We.
We saw double digit gains and Agrichemical adhesives, and oilfield all end markets that demand high performing products. Our technology teams are constantly working with customers to find new applications, where our products can purify protect and enhance the world.
In summary, Steve and I couldnt be more proud of the team and what they've delivered during the quarter posting these results with all the challenges we face is truly an impressive accomplishment and we want to thank everyone for their hard work.
I will now turn the call over to Ed to discuss the performance materials. Thanks rich.
As you can see on slide eight sales of the performance materials segment were up over 22% to $144 $9 million versus the prior year's quarter.
This increase reflects the rebound in automotive production driven by improvements within the global automotive supply chain.
Throughout the quarter, we saw sequential volume increases in each month within both our auto carbon and honeycomb products.
Our sales in Asia Pacific were up almost 40% versus Q2 of 2022 as volumes rebounded from Covid impact Q2 lows.
Q3, North American automotive production was at the highest level since Q4 of 2020.
And we're seeing signs that Oems are rebuilding vehicle inventories.
We were quite encouraged by our sales in Europe , which improved roughly 19% year over year as the availability of auto parts improved.
The EU is still working towards implementing a more stringent regulatory package for auto evaporative emissions and we're expecting to hear an announcement before the end of the year.
Our expectation is that the potential regulations in Europe would look similar to Brazil's requirements and could go into effect as early as 2026.
Our sales in Brazil are illustrative of the impact of more stringent regulations.
While Brazil has a smaller sales footprint for us than other regions, our sales have more than tripled to last year.
We expect continued growth in Brazil over the next several years AG regulations are fully implemented.
Segment, EBITDA was $61 2 million and eight 5% increase from last year.
Segment EBITDA margin was 42, 2% down compared to last year, primarily as a result of increased energy and raw material costs. We.
We typically negotiate price with our auto customers annually early in the year.
Although we increased our prices this year, particularly in the process purification market the rising inflationary costs throughout the year have outpaced our automotive price increases that were implemented during Q1.
I will now turn the call back to John to discuss the outlook for 2022 and for closing comments.
Thanks, Ed on slide nine you'll see our revised guidance.
As we've said demand continues to be strong. So we have raised the range of our sales and EBITDA guidance.
I'll also spend less in Capex this year than expected, but we remain committed to maintaining safe and reliable plants. While also investing in organic growth initiatives that bring value to the company.
As we look forward to the end of the year and into 2023, we are monitoring the broader economic environment. Much is being said about a potential recession in the coming months, particularly in Europe .
Demand remains robust in our businesses, however, customers in a few markets adhesives and certain engineered polymers customers are signaling a focus on inventory destocking in Q4.
It's unclear today of this destocking is short term in nature or something more sustained.
At a high level going forward.
We expect continued benefit from a recovery in auto production in both the performance materials segment in our engineered polymers business with.
With auto production numbers still low today, we should see them continuing to improve over the next several years and we will benefit.
Additionally, we should benefit in our enlarge pavement technologies businesses as infrastructure spending continues to flow into municipalities for road construction and repair.
Engineered polymers margins have suffered due to energy cost freight and other material cost inflation in Europe .
We are adjusting prices accordingly, and expect to benefit into next year as our margins improve.
For industrial specialties, while we faced higher pine based raw material costs and may see potential slowdowns in orders due to economic conditions, we see the benefits of the new regulatory driven biofuel market for TOEFL beginning to take hold.
Increased use of alternative raw material to supply both the chemical industry and biofuel markets are also exciting opportunities for us to offset any recessionary pressures in our legacy markets.
Finally, you will see on slide 10 that we are planning to host an investor day event next spring.
Originally we plan to have it in December but in an effort to increase transparency to you. The investors. We are in the processing a process of evaluating how we report our businesses. We didn't want to have an investor day in a potentially change how we show and explain our business to in the next quarter, we will complete our assessment and then hold the Investor day early in <unk>.
Each year, we are in the process of rescheduling and we'll keep you posted but our goal is to give you all as much information as possible about in jeopardy.
We look forward to sharing with you what we believe are exciting opportunities for us to continue to grow and further increase our profitability.
And we hope you will share our enthusiasm for <unk> with that I'll turn it over for questions.
Thank you.
As a reminder.
I would like to ask a question press star one on your telephone keypad.
We'll pause for just a moment to compile the Q&A.
Okay.
Okay.
Yes, I will.
Last question from the phone lines from John Mcnulty with BMO capital markets. Your line is now open.
Thanks for taking my Hey, Thanks for taking my question really solid results.
So was curious on the.
On the performance materials business, I guess, how far or can you quantify how far you might be behind on the price versus raws.
Situations and then I assume that catches up pretty quickly since you are the kind of big supplier in the industry catches up really quickly once you reset the pricing next year is that is that right.
Yeah, So look as it.
Ed alluded to we sort of do an annual price increase in that business right. So you.
You will see us in early next year.
Raise prices to our customers.
And we will get back that margin I don't really want to quantify the exact hit because as you know John I mean, as we've always said quarter by quarter things can vary we have outages et cetera, but our intent will be to return to what we consider to be more normalized margins for that business, which are more in the mid <unk>.
<unk> mid to high <unk> right. So that is where we plan to go.
Got it fair enough and then.
Paving obviously pretty strong numbers pretty strong numbers across the board really but I guess at this point can you speak to how you're seeing 2023 lay out it sounds like you've gotten a lot of incremental interest from the municipalities I would assume some of this gets planned out a year in advance. So I guess can you speak to.
Kind of how things are maybe starting to look for 2023.
Look it's obviously a little early because these are annual paving campaigns.
What I will say is as we move through the end of 2022, the weather remains pretty warm.
So as you know when the weather remained warm we're able to pave longer into the season, so that bodes well for the end of this year into next year I mean, we feel good about it certainly in the U S with the infrastructure spending.
And we do expect that money to flow through but we wanted to sort of let's see how we get through the end of this season and see what they sort of set up for next year.
Got it fair enough, maybe I can squeeze one last one in just around around Ozark. So I know you haven't owned it particularly long.
Can you can you kind of tell us what youre seeing right now the overlap of that business versus your paving business in terms of in terms of customer base and how maybe you can you can leverage areas, there where one has a relationship and maybe the other doesn't and then all of a show.
Got it sorry.
And also just remind us of I know theres extreme seasonality in this business. So just so we all kind of model. It out properly I guess can you can you remind us of how that seasonality works as we look to 2023.
For sure.
The.
First off Ozark as a tradition fantastic edition of this company right.
It's a great group of people, we've all been out to see them.
Then all of our sites here, except for one in North America, Great group of people with a great business. There are obviously a lot of opportunities for us while.
It is a different in product the way we describe it to people as our customers are in the same building if not in the same room right. So when we go to call on them. So we have a great opportunity to leverage those relationships, where they have strength and we don't where we have strength and they don't.
Certainly as they move more looking at things more international here in North America, whether it's in Canada or in the Latin America, we will bring capabilities to them that they don't have today.
It's pretty exciting for us.
From a seasonality perspective, it's really not that different from our legacy payment business and that its tied to weather right. So.
When snow hits the ground, it's pretty hard to pain, just like it's hard to.
Do any do any road work so I would think about it in that regard as you know the vast majority of the profitability in that business, which can be in the 70% plus range occurs in Q2 and Q3.
But.
Think of first quarter and fourth quarter as sort of an anchor shoulder season right in.
As I mentioned earlier, we're actually having a pretty good Q4 in that regard because the weather has been warm, but it is not like that every year right.
Got it thanks very much for the color.
Thank you.
Our next question comes from wireless.
Anderson with Stifel. Please go ahead.
Yes, good morning.
So it sounds like maybe IMAX Sally front running.
The new reporting metrics for next year, but.
Given the volatility in cap as input costs recently, but also.
Very strong performance on the sales side.
Could you speak maybe just qualitatively about the trend in that business is maybe gross profit per pound or some other similar metric that gives us a bit more insight than just the consolidated segment margins.
Well, yes, so I mean, I guess the way to think about it.
You are correct I mean that business because it's based in the UK is grappling with issues that are even more challenging than what we have here in North America right. So its margins have come under pretty significant pressure.
While they've been able to actually see phenomenal demand increases for their product right.
Truthfully I think they've got a little behind in terms of their ability to keep up with the price increases, but I think we're going to fix that right. We are.
Already started implementing.
Price increases over there to recapture that I think.
Speaking to your comment about gun jumping the segments part of the challenge when they are operating as a consolidated segment as it didn't have as much visibility as we would like them to have into their cost structure, and we're going to fix that alright.
But.
We look we look at their margin back over the course of next year.
Okay sounds good.
And then I was just curious what your read is right now on European bio refining of CTO. It looks like there is still just the same three plants that we know for sure our processing CTO, but just wondering if you had any additional insights into that market.
Fully online.
And then as kind of as.
As an aside how much pressure you're seeing on U S CTO availability with Russia now out of the European market.
Yes, well go ahead, Mitch certainly and thanks for the questions certainly that CTO market remains very dynamic.
Globally, there's about 2 million pounds of CTO.
Ian pounds here in the U S.
I'm sorry.
In the U S and same in Europe . There is about 200000 tonnes coming out of Russia, but it is not coming out of Russia for all the reasons that we know, but certainly to your first question. We continue to see additional production capacity come on within the bio refinery market and expect that to grow just based on the route to Ines.
<unk> and <unk>. The CTO, we are seeing inflation on on the on the raw material, there and expect to see that going forward, but the market will remain very dynamic for the foreseeable future.
Okay, Perfect and then just one hopefully a quick one on performance materials, just curious what the areas of process purification.
Or that you have had particular success in recently and if that pricing power you reference there is outperforming the traditional activated carbon.
<unk> products.
Yes.
The majority of our process purification revenue is in North America.
Process excuse me our process using sought us in phosphoric acid.
Creates a unique poor structure.
Our competitive materials do not have.
We are the only carbon manufacturer in North America. The uses this process as compared to raw materials, such as bituminous coal or lignite coal.
So the uniqueness of our process and products will give us some inherent advantaged performance advantages that the competitive carbon don't have versus our carbons and so we obviously have an advantage in a number of areas and we capture the value with our with our pricing.
Okay. Thanks.
Thank you.
Now have a question from.
John Zang.
Please go ahead, when you're ready John .
Hello, Yes, hi, good morning, Hi, good morning, its actually Pete Lukas for Jon This morning Hello.
Hi, just following up on Ozark anything you can say to quantify any expected synergies at this point now that it's closed.
As rich said, we expect.
Roughly $5 million in synergies that we would capture over the next 18 months.
Great very helpful.
And then just jumping to any updates on euro six and China six regulations and when they are expected to be finalized and implemented.
Yes. This is Ed we're expecting.
<unk> an announcement in November from Europe around the regulatory package that they are putting in place.
We expect as I said earlier to be similar to what Brazil has so or VR with some diurnal emissions requirements be it either 300 milligrams or 500 milligrams I think.
Are the two options that are on the table.
But we do expect an announcement in November and with the.
Some timing of adopting the regulations beginning around 2026 would be our best estimate I.
I would also say Peter.
I think we should get this out there I know that there were some rumors around a lead copy of the new requirement and it was circulated in some of the European papers and some write up Ed.
The headlines do not reflect the reality as it relates to our business when you read things like that.
We're not changing it theyre going to keep it the same what they're really talking about is a tailpipe. If you read that leads copy and we're not commenting on it.
Lastly, haraszti or efficacy or what have you, but if you were to read it thoroughly you would see that.
Emissions that are relevant for us I E. R. E. Bap emissions are still in there as are some other regulations that will be tighter around things like tires et cetera. So just would put that out there for everyone.
We saw that we know those articles are out there, but they do not portray what will happen to our business correctly.
Very helpful. Thanks, and last one for me just if you could talk about what youre seeing in terms of M&A opportunity today from a pipeline perspective or are you more concerned with integrating what you have and maybe doing other things with your cash.
Well I mean, obviously, we just closed on something like a month ago. So right now the near term, we're definitely focused on making sure we maximize the value between ourselves and Ozark look our capital allocation priorities really haven't changed I mean, obviously to the extent we move into a recessionary environment, we do <unk>.
All right a lot of cash and we have the ability to pivot that.
To protect our balance sheet as needed.
But longer term, we're going to continue to grow the business and we're going to look at M&A and we're going to look at.
Turning to return capital.
Add to that.
M&A as you know it can be a long process, we had actually been looking at <unk> for quite a while before we brought that transaction to completion.
So we're looking for good fit good strategic fit and has to be the right opportunity. So we have a pipeline we continue to manage the pipeline, we announced that R&R hands and.
Wait to Digest any acquisition, we're always looking but we are balancing our leverage cash flow and making sure that the opportunity is strategic and a good fit for the company.
Extremely helpful. Thanks, I'll jump back in the queue.
Thank you.
We now have another question from.
Vincent Anderson with Stifel. Please go ahead.
Yes, hi, thanks for entertaining some more here I wanted to follow up on that performance materials question that I left off with.
I'm just wondering.
<unk> had a lot of success in moving <unk>.
Production into that market, obviously very.
Aware of its advantages there, but automotive was always the cream of the crop.
As automotive comes back.
I think we've been saying that every year for three years, but let's say it comes back.
How are you thinking.
How are you thinking about balancing.
Sure.
Allocation of capacity between those two businesses. If you wanted to kind of maintain a good relationship and the process purification space.
Yes, Vincent this is Ed obviously, what will you be seeking for is where can we place our products for the highest value in the highest margin contribution to them in.
Continue to do that that's that is primarily our automotive segment and the honeycombs as well.
We do have some high value segments within our process purification and will protect those but theres, some lower value opportunities, where we produce product for water markets, which.
It will really help us from a contribution margin standpoint, but we'd much rather be selling automotive products and other other higher end products that we've got into the market. So we'll easily walk away from water markets to swap out for automotive sales.
Okay, no that makes that makes a lot of sense.
And then we've talked about this in the past I believe most of your presentation in the biodegradable plastics space is more selling to compound but it.
It feels worse asking there is a very big PLO investment planned in the U S from like a mature supplier.
And now that you've started some build out some capacity of cap of here.
Are there any thoughts around maybe an even more significant investment with a large offtake partner.
On the upstream side of the Bioplastics space.
We're not going to.
Don't want to talk about as you know.
And we've been pretty open with everyone I mean, our staff.
We're very careful about specific customers that we referred to with us because.
Yes.
A big part of their formulations in a part of their competitive advantages. So we don't want to go into that but what I will tell you is as we are always actively looking at expanding capacity when our customers need.
Right. So we are looking at some point at doing another mono or another monomer streamline.
We just did the polyol is in Louisiana.
We will continue to invest and grow in that business as our customers need more volume.
Okay very fair and then just one one last one I promise because.
<unk>.
Tipped your hand on what the price was I was I had a coin flip between sulfuric and phosphoric acid, but when you talk about recovering margins next year, obviously, you have pricing power.
But if I'm not mistaken phosphoric acid is already largely corrected back to pre 2022 levels. It looks like so maybe just absent pricing activities, what's kind of the lag effect on when that will move through your margins.
Yes.
We will introduced pricing starting on January one.
We typically try to help our customers so that they can recapture the cost.
So.
And so you look at Japan fiscal year begins April one and so we will have a price increase there as well so that they can again make sure that they put those prices that were putting in so they can recover them from their various suppliers.
One of the benefits we have though Vincent as you know is that this is not a cost plus type of business right. So we discussed price increases, it's typically tied to more than just one individual variable.
Okay.
Sure, Okay, alright, well thanks.
Thank you we now have the next question from Ian Zaffino with Oppenheimer. Please go ahead, when you're ready.
We are partnering with.
Alright.
And we apologize as well to you to Ed and Mike somehow we love events, but somehow I didnt realize you could cut line.
On our conference call.
Go ahead please.
Yes, Thats quite right, yes, most of my questions are answered, but just.
I wanted to ask you on the paving side.
And maybe this is a very difficult question to answer but can you give us a little bit of color on.
Paving and how much per se goes into single family homes and that area of the market compare to the other areas and maybe what youre seeing on both sides and both areas. Thanks go ahead rich. Thanks, Dan. This is rich the majority of our products that go for single family homes and driveway.
We go the more commercial product that you see.
That you can get at a home depot Lowe's.
But most of ours is for highways highways and roads and whether it's arguable thumb, our pavement preservation product, mainly on highways and roads and not on residential homes.
Okay. Thank you very much I appreciate that.
Good quarter again.
Thanks.
Thank you.
We now have annual reserve of Jefferies. Please go ahead, when you're ready.
Good morning, everyone. Thank you for taking my questions.
With proven technologies and as you said the contracts with the different municipalities is there kind of like a take or pay component where they have to.
By a minimal amount each year, regardless of weather or contract or how does it work.
This is rich again, no there is not a take or pay.
For the municipalities.
Big certain amount of product and they use it as they need to pay various mileage of roofs, and then ultimately, but we basically a lot of a lot of situations where tanks on site that are metered and controlled by sensors and so we dropped the tank and they told us they need it and they go as long as I can tell the weather turns and when it needs to be refilled.
We refill it.
But they will buy a certain amount, though I mean for the contract Mike.
They'll take the two tend to whole tanker two tanks or whatever they think is going to be required correctly don't that doesn't change what doesn't.
Well they are able to tell us they've kind of job that they are going to be working on for that season, and then that job is then the formulation for that job has been developed on how much they're going to need and that's how they go about providing the product, but again to your initial point is not a take or pay is just based on usage level and what's going to be needed to.
Paid a certain amount of room.
Okay, and then you mentioned the five with those off the $5 million of synergies I assume youre talking about cost over the next 18 months can you or have you quantified that I missed it any potential revenue synergies you did say some of the highest in the same building just and I apologize if I missed this maybe you could just kind of parse that out.
Yeah, Dan, we where we are right now focused on the cost synergies and the number that we mentioned is is cost focus since you say the revenue synergies.
We expect there to be revenue synergies.
As you know most people don't give a lot of credit for for revenue synergies. When you talk about them, they're harder to get and perhaps harder to find in the P&L, but but we feel really good about that.
The package of opportunity that we'll be able to offer to customers and unexpected.
Youll hear more about that in the future, but but we will update you periodically on the cost synergies that we realized.
With <unk> with your business are there is there a long lead time for new contracts, whereas.
It's going to take a couple of years for anything to be realized anyway, just because of the way.
The process works.
I don't agree with that that's not really true Dan.
The issue that we run into with top line and I assure marriage view.
It is very subjective what is actually a synergy versus what is something that was just normal course business right and we think theres opportunities for our salespeople to work together to complement each other there's opportunities for them to enter markets. They are not in today through our salespeople, but we're not going to look at it and call. It a quota.
Synergy is going to be more sales growth as you move forward. What we're focused on is capturing the cost synergies.
Because those are real tangible quantifiable and we can move the needle.
Okay. Thank you very much for fabrication of it.
Go ahead I'm sorry.
I was going to add we were this is Richard can I was going to add we're very excited about as John has already mentioned the growth synergies, but that is the growth in terms of how the.
Ozark business can benefit from the extensive network that we have globally for our payment business today Ozark as a north American company products had done here in the states only not necessarily in Canada to some extent in Canada not in Mexico, but if you look at our footprint, which is in Europe , and South America and India.
Australia, there's a broader component to what we expect to do with those portfolio that we're very excited about.
Alright, Thank you very much.
Thank you.
Hi, Michael Sison with Wells Fargo. Your line is open.
Hi, there this is actually <unk> on for Mike.
For taking my question. So looking ahead to 2023 and a potential recession.
I know you briefly touched on this in the call, but I was wondering if you could provide a little bit more color on how you expect your segments to perform in a potential recession.
I know that auto production is expected to increase and that should be a tailwind purpose.
But specifically performance chemicals industrial exposure do you view that at this point.
Yes look so so well.
Well, let me try and tell you how we're thinking about it we obviously.
And this is what we do for a living we think about these things every day, we want to plan for the future.
And we wanted to be prepared if something happens and we will we are prepared.
From our perspective, though and we will just kind of work our way through it and you touched on some of it.
First and foremost we're going to see improvement in the auto production predominantly because it's off such a low base right. So.
We will benefit from that in both our performance materials segment, but also in our engineered polymer segment. So that will be an offset to what would be more of a broader industrial recession. We also have our pavement technologies business right.
Which we've just actually bolstered in size, but that business will benefit from the infrastructure spending.
What we have seen in past recessions as governments like to turn on that type of spending because it shows that our constituents that they're actually doing something and they are trying to create jobs et cetera et cetera. So.
We will benefit from those and both of those sort of key end markets right. When you think about the legacy pine chemical business, we've actually been dealing with very very March inflation for a couple of years now right. So we've been working very hard as many of you guys have heard us talk about to reposition that business is Mary Lou.
<unk> two we've kind of cut our merchant sales are under river tides, Commoditized type sales and half.
Back in 2016, it was a third of our sales right, probably not something that was broadcast or all that well known but it was a large chunk back then today, we're down to about 17%.
I also think that this economic softness will be different from the last one because we did not have in the last time last downturns. We had these issues in the far east that were sort of.
Not market, driven but more driven by plant shutdown with regards to turpentine and what that did to rosin pricing right. So that was a one off that's not going to be a part of the equation, which is going to take a lot of pressure off of us in the next sort of downturn. So as we've moved away from these <unk>.
Commodity products and we've continued to broaden our raw material base.
Some of our end markets are going to soften, but we think we're in a good spot to counteract those and to be nimble and to push forward, where we think we have opportunities to grow to offset that so that's how we're thinking about it we're looking at it sort of market by market.
And we're in position to see how this plays out.
Okay. Thank you and then also just touching on raw materials.
You noted that you've seen 50% increases in some of your key inputs can.
Can you speak to which ones are the worst in terms of inflation.
Are there any that are more of a sense.
Coming down I know you said somewhat E filing.
I mean look like every company, we are seeing inflation in almost all of our raw materials right. Our crude tall oil is inflated multiples higher from where it was.
Edge business in performance materials, the same pressure and phosphoric acid and energy costs are sort of cascading through all of our businesses logistics freight et cetera. So.
It's hard to say that there is one that is.
If it turns down is going to sort of change things right. We manage this.
We manage each of them very carefully we have dedicated supply chain specialists that work to manage each of those so.
Whether it's moving rail and truckload and trying to get our costs down there we have people that work on energy we.
We have dedicated buyer so.
We manage them and we push price through to offset when we where we need to.
And we will see what.
Yes, what I would say is while they remain elevated they don't appear to be continuing to increase so.
That's probably a good thing.
Got it thanks.
As a reminder, if you would like to ask any further questions. Please press Star then one on your telephone keypad.
The next question comes from.
Christopher.
The capital market.
You May proceed with your question.
Thanks, Chris.
Hey, good morning, I had a couple of follow ups you mentioned some potential destocking in the Pine chemical segment I believe.
Non <unk> product lines I'm, just curious if you could if you were referencing more copa or Raj, but any color there would be appreciated.
Not exactly what we said right what.
What we saw we saw what we think could be some destocking in two very specific end markets. One is in adhesives.
Packaging adhesives, so pretty narrow, but we did see some some destocking and some slowdowns there and then also in just a handful of our engineered polymers businesses right. So.
It wasn't that's all we've seen so far right.
Watching it but thats really all we have seen as a company.
Okay.
Just curious on the on the rosin side for the adhesives and market is is it enough to alter your.
Your calibration in terms of your refinery run rates.
As you know Chris.
Chris.
Where we sit.
Where volume constraints.
Yes.
We can get we're going to run.
We're a long way from that.
Yeah and then.
Just to follow up on the inflation and feedstock costs.
Focus on the pine chemicals business so.
I'm just.
Yes.
<unk> CTO, obviously, the big one ever since the Georgia Pacific acquisition. There is an energy component factored into your CTO costs I believe so I'm just curious about the inflation is it more predominantly a function of this global supply demand situation with CTO or where is the potential that lower energy costs and I'm watching CWT.
Sort of.
Coming back from peak earlier this year is there any potential that back in.
CTO costs or is that not really.
Good question and it deserves a longer conversation right. So maybe we can talk about on our follow up but the truth of the matter is is that the CTO is really being driven by global supply and demand for the marketplace right.
Regardless of whats really going on with oil there or there is.
As a correlation though to fuel right so as fuel costs come down.
The value of our biofuel comes down at all sort of move somewhat in tandem so.
As those pressures abate that it would it could there in theory put some downward pressure on CTO prices, but.
Right now it's <unk>.
Apply in demand game amongst all of us who use it.
Fair enough and then lastly, just to follow up on your response to it.
Looking at our recessionary scenarios and the fact that.
There's no <unk>.
Mike and turbine planning prices, so should I interpret that as youre, saying that the.
There is no real incentive for Chinese gum rosin producers to go after that natural turpentine and therefore.
There is not an oversupply or you don't wouldn't expect an oversupply of that competitive material. The gum rosin. It depends how you define oversupply, but as you know what happened last time, because that turpentine plant went down the Chinese went out and tap trees to get at the turpentine and they've got ryzen as a byproduct.
Not the normal marketplace for that type of gum rosin that situation in the region.
Of your mirror.
At this point kind of two years ago, we don't see that happening.
So we think while you might see some pressure because we always look at gum rosin pricing during the harvesting season.
It will be more manageable than what we saw the last time and we also are managing it ourselves by staying away from sort of merchant sales markets right. So kind of attacking it from both angles.
Thanks, John .
Thank you.
Thank you.
As we have no further questions I'd like to hand, it back to Tim.
One of them.
Thank you break that concludes our call. Thank you for your interest in <unk> and we will talk to you again next quarter.
This concludes today's conference call you May now disconnect your line.
Okay.